Co-operatives, Mutuals and Friendly Societies Bill

Debate between Mark Hendrick and Luke Evans

Friday 28th October 2022 Commons Chamber

[Sir Mark Hendrick (Preston) (Lab/Co-op)]

I beg to move, That the Bill be now read a Second time.

May I begin by thanking the former Minister, the hon. Member for North East Bedfordshire (Richard Fuller), who is in the Chamber, for his time and effort— I am also grateful to civil servants for their time and effort—and for our fruitful discussions, which have led me to introduce the Bill in the Chamber? While the Bill does not cover the whole scope of what I wanted to achieve, the fact that the Government are willing to give their support to a key part of my proposals and instruct the Law Commission to conduct a review of legislation affecting co-operatives, mutuals and friendly societies is, in my view, major progress.

I first became active in the co-operative movement 40 years ago, when I bought a £1 share in the Norwest Pioneers Co-operative Society in 1982. The society had evolved from the actions of the original Rochdale Pioneers in 1884, and set up what is generally regarded as the first successful co-operative retail venture. The society was set up in the harshest times, when 19th-century industrial capitalism was on the rise. It was an age of child labour, exploitation and poverty. Sometimes owners of cotton mills paid their workers in tokens, which could only be spent in shops owned by the mill owners. In those shops, the food was often adulterated, so those pioneers set up their first shop in Toad Lane in Rochdale. It was an explicit example of self-help, which started a movement that is now global.

Co-operative societies then mushroomed to form dozens of co-operatives in many Lancashire towns and cities until the 1930s, when the Manchester, Salford and Stockport societies amalgamated to form the North West Co-operative Society. In July 1982, what became the Norwest Co-operative Society merged with the Pioneers Co-operative Society to form the Norwest Pioneers. I bought a share later that year. I would never have dreamed that 40 years later I would have the opportunity to stand here and propose a new piece of legislation that could help to preserve and protect members’ assets accumulated, in many cases, over generations from potential predators who, in recent decades, have sought to take away those assets from members for their own personal profit and gain. That matters to me because co-operation and mutuality are about equity and fairness. The growth of co-operatives in the UK is an integral part of the levelling-up agenda; it can provide many thousands of new jobs in the economy; and it is complementary to the Government’s growth agenda.

Alongside investor-owned firms, co-operatives, mutual insurers and friendly societies have an important part to play in the biodiversity of our economy. These businesses share their origins in self-help movements that are relevant to the economic and social challenges that people face today.

[Dr Luke Evans (Bosworth) (Con)]

The hon. Gentleman is making a fantastic speech. In my constituency, in Hinckley and Bosworth we have several building societies spawned from the fact that we had shoe manufacturing there. Does the hon. Gentleman agree that it is fantastic to have a mix of options for people? These organisations will often pick up people who may not be able to get finance and support they need, but because they have that local community connection they are able to make that judgment and give people the support they need; that should be welcomed.

[Sir Mark Hendrick]

I agree and commend the hon. Gentleman for his comments. Co-operatives spring up from local communities; they are bottom-up, grassroots organisations—certainly not top-down.

As I said, alongside investor-owned firms, co-operatives, mutual insurers and friendly societies have an important part to play in the biodiversity of our economy. They need a business environment that facilitates this: Government policy that understands and supports the mutual business difference; and legislation that is up to date, flexible and permits co-operatives, mutuals and friendly societies to undertake their purpose of serving their members’ needs in the best way possible. Only by working in a modern and supportive business environment will co-operatives, mutuals and friendly societies be able to make a full contribution to the prosperity of our country by serving the interests of customers and citizens. Yet demutualisation remains a real and present threat to the mutual sector, which is, unfortunately, incentivised by the system.

My Bill is about giving mutuals the option to maintain mutual capital for the purpose it was intended. There is a fundamental distinction between the rights of members of a mutual society and members of an investor-owned company. Members of a company—shareholders—have the right both to a pro rata share of distributed profits, or dividends, based on their shareholding, and also to a pro rata share of the underlying value of the company. The more capital they own, the greater their share of the profits and of the value of the company. Members of a mutual society, by contrast, generally have neither of these rights, because in mutuals profits are generally not used as a mechanism for rewarding capital, and members of a mutual do not have any expectation of any entitlement to a share in the increased value of their society.

Since members of a mutual are not entitled to any share of its increased value, the amount by which the net asset value of a society exceeds the capital provided by members—commonly referred to as the “capital surplus on a solvent winding up”—has no specific owner. It is effectively a legacy asset, held by the society for future generations, and enables it to provide for, and invest in, its future. It is a core part of its mutual identity. It represents the trading surplus accumulated by previous generations of members participating in their society’s business, in which they were always content to have no personal share. By implication, it is held for the benefit of future generations. Societies were originally set up not to make a capital surplus to reward members, but to provide goods and services for those who need them; that was the purpose, and this was the basis upon which previous generations have taken part in the trade.

Seen through the lens of investor-ownership, a capital surplus is a tempting asset—a windfall or unearned profit —which, if mutual members were to be replaced by investor-shareholders, could be shared out among those shareholders. Capturing this asset is the usual incentive for a “demutualisation”, which is when a capital surplus or legacy asset is divided up between shareholders—when the mutual agreement between the former members, whereby they engaged in their society on the basis that they would not personally profit from its trade, is broken up. In short, it is when a mutual purpose for the common good is replaced by a profit-driven purpose for private benefit.

In UK law there is no generic or principled recognition of the value to wider society of mutuality or of the legacy asset of a mutual society. As a result, the ability to access legacy assets actively incentivises demutualisation.

[Sir Mark Hendrick]

I thank the hon. Member for his intervention. Actually, I will come to that later in my speech.

Provided that the relevant formal procedures are completed, including securing consent from a statutory minimum threshold of members, a demutualisation cannot be stopped. That threshold has been changed from time to time for different types of mutual societies to make demutualisation less likely, but those measures provide only partial protection. There is currently no statutory mechanism for ensuring that surpluses, which previous generations never intended to be a private reward for anybody, remain committed to that wider public purpose.

At the moment, legislation governing mutuals can incentivise demutualisation by permitting those legacy assets to be distributed. Legacy assets have often been built up over many generations of membership and can constitute a significant part of the working capital of the business. Current members typically have not contributed to that capital base but have enjoyed the benefits of previous years of successful trading. Most demutualisation attempts succeed, assisted by a significant power imbalance between the boards of mutuals and members.

The example of Liverpool Victoria last year shows that demutualisation attempts can, however, be defeated, even when proposed by a mutual’s board. We should be wary of the interests that private equity is showing in mutuals across the world, attracted by the prospect of acquiring significant assets built up by generations of members. At present, it is not possible for an existing society, or those setting up a new society, to proscribe demutualisation. That leaves mutuals vulnerable to those simply aiming to liberate those legacy assets, sharing them out among people as they choose, and converting the business into an investor-owned company. That has resulted in much of the UK building society sector being lost and their businesses either failing or transferring to non-UK ownership. That has been bad for mutuality and bad for the economy, given the damage that it has caused to corporate diversity.

Demutualised former building societies were mostly absorbed into banks that failed during the financial crisis. None of the demutualised former building societies continued for long as an independent bank. They became part of larger listed banking groups or, in the cases of Northern Rock and Bradford & Bingley, failed in the financial crisis and were later nationalised. Moreover, those demutualisations converted some of the largest building societies at the time. The argument for demutualisation has proved to be bogus. It has not delivered the strong independent businesses that it was supposed to do, and the need for more capital is soon forgotten as the newly proprietary entities are generally merged into larger firms.

Diversity of ownership types and business models creates a corresponding diversity in forms of corporate governance, risk appetite and management, incentive structures, policies and practices, and corporate behaviours and outcomes. It also offers a wider choice for consumers and enhances competition that derives in part from the juxtaposition of different business models.

Legislation is needed to help UK mutuals to preserve their legacy for the purposes for which they were intended, to maintain and encourage greater corporate diversity, and to build a more resilient economy. Mutuals need to be able to incorporate appropriate measures into their constitutions which have a statutory basis, either at the point of establishment or thereafter, with an appropriate level of member approval. This will be even more important if the legislative reforms for co-operative and community benefit societies explained above are taken forward. To optimise the successful implementation of new legislation, properly recognising legacy assets for the benefits they bring will be an important ingredient for building confidence.

Many jurisdictions have acted to preserve mutual ownership by ensuring that assets are used only for the purpose for which they were intended. That ensures they cannot be distributed to members or third parties, and thus disincentivises demutualisation. Mergers, dissolutions and transfers of business are still permitted, so this arrangement does not hamper the evolution of business in any way. Ideally, such measures will be universal, but in some legal traditions that is considered problematic as it arguably alters members’ ownership right retrospectively. It is not desirable to cut and paste legislation between different traditions, so solutions are required that respect the culture of different legal frameworks. To deal with that, simple legislation can be introduced in common law jurisdictions that would give every mutual the right to choose a constitution that preserves legacy assets for the purpose they were intended.

My Bill does that. My Bill disincentivises the raiding of legacy assets. Voluntary legislation will ensure that legacy assets are preserved for the purpose for which they were intended. It empowers mutual members to decide what should happen to assets on a solvent dissolution. It would match the best legislation that exists in many other countries. My Bill also: introduces a voluntary power to enable a mutual to choose a constitutional change, so that its legacy assets would be non-distributable; details precisely the destination of any capital surplus on a solvent winding up; outlines the procedures necessary to include such provisions in a mutual’s rules; and inserts a statutory provision for the relevant rules to be unalterable. My Bill will define the capital surplus as the amount remaining after deducting a mutual’s total liabilities from its assets, including repayment of members’ capital.

[Dr Luke Evans]

The hon. Gentleman is making a fantastic speech on how to protect from demutualisation, but it seems a very defensive way of looking at things. Will the Bill provide a chance for new innovations and further capital to be brought into the sector to help its members?

[Sir Mark Hendrick]

I thank the hon. Gentleman again for intervening. One proposal I did not take up and put to the Government was the idea of a new share for co-operatives that would allow them to develop in a way that they have not been able to before. Unfortunately, the Government are not at the moment able to do that, but it would bring in the additional capital to encourage the growth he talks about. I understand from the Government that it will be considered as part of a Law Commission review of the sector. The issue is on the agenda; it is just not included in the Bill at the moment.

My Bill will introduce new provisions to maintain the destination of the capital surplus to ensure that where a mutual’s rules make the capital surplus non-distributable, any resolution to convert it into, amalgamate with or transfer engagements to a company shall also include a provision to transfer the capital surplus, as provided by the rules in the event of a solvent winding up. With the support of the House, we will be able to incorporate sensible amendments that ensure that this legislation works for the co-operative and mutual sector, and fits in with the Government’s stated policy objectives.

In finishing, I would like to thank the Minister and his officials for their time devoted to holding discussions and their help in re-drafting parts of my Bill to our mutual satisfaction. I thank Peter Hunt and Mutuo for their help, advice and expertise throughout the time we have been working together on the Bill, and I thank the Co-operative party and the co-operative societies, mutuals and friendly societies that have engaged with me to give me the encouragement and enthusiasm to get to this stage. I look forward to working with parliamentarians from across the House to get the Bill through the forthcoming stages required to bring it into law.

Before I sit down, Mr Speaker, I would like to declare an interest as a Co-operative Member of Parliament and as a member of a co-operative society.